Wednesday, July 21, 2010

I recently analyzed the annual report of spirits maker Brown Forman (BF-B), which is one of the newest additions to the S&P Dividend Aristocrats index. I was amazed to learn that some of its top selling products were Jack Daniel’s Tennessee Whiskey and Finlandia. It is very intriguing how the company has been able to leverage the brand name of its top selling products by cutting costs to the bone and increasing efficiencies, while at the same time expanding sales internationally. This had translated into growth in earnings per share, which also fueled a 9.8% average annual growth in dividends over the past decade.

The similarities between Brown-Forman (BF-B) and other prominent dividend aristocrats do not end here. Most elite dividend stocks are household names, whose products and services are available to consumers and businesses worldwide. They are easily recognizable names for which consumers are willing to pay a premium in order to enjoy them.

The strong brand name provides a good differentiation strategy versus competitors, which ensures that the company is able to charge a premium for its products and have an enduring wide-moat business.

Other companies with strong brands which have been able to provide a growing stream of dividends include Procter & Gamble (PG), McDonald’s (MCD), Altria Group (MO), Coca Cola (KO) and Abbott Laboratories (ABT).

The Procter & Gamble Company (PG) engages in the manufacture and sale of consumer goods worldwide. The company operates in three global business units (GBUs): Beauty, Health and Well-Being, and Household Care. The company has rewarded stockholders with dividend increases for 54 consecutive years. Annual dividends have increased by an average of 10.70% annually over the past decade. The stock currently yields 3.10%. Check my analysis of the stock.

Altria Group, Inc., (MO) through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in the United States. Philip Morris International Inc (PM) on the other hand manufactures and sells cigarettes and other tobacco products in markets outside of the United States of America. Before spinning off Kraft (KFT) and Philip Morris International (PM), Altria had an uninterrupted streak of 41 consecutive annual dividend increases. The spun out companies are also likely to return increasing amounts of profits back to shareholders in the form of share buybacks and dividend increases. I like both MO and PM for global exposure to tobacco. The stock currently yields 6.60%. Check my analysis of both stocks.

McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants in the food service industry worldwide. Its restaurants offer various food items, soft drinks, and coffee and other beverages. The golden arches has raised dividends for 33 years. Annual dividends have increased by an average of 26.20% annually over the past decade. The stock currently yields 3.10%. Check my analysis of the stock.

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. It principally offers sparkling and still beverages. The company has increased distributions for 48 consecutive years. Annual dividends have increased by an average of 10% annually over the past decade. The stock currently yields 3.40%. Check my analysis of the stock.

Abbott Laboratories (ABT), which manufactures and sells health care products worldwide, has raised dividends for 38 consecutive years. Annual dividends have increased by an average of 8.80% annually over the past decade. The stock currently yields 3.70%. Check my analysis of Abbott Laboratories (ABT).

Just because a company owns a strong brand, investors shouldn’t simply rush in to purchase the stock. Overpaying for future earnings is likely to cause diminished returns over time. That’s why having a strict entry criteria and requiring at least a decade of consistent earnings and dividend growth should weed out the fads from the trends.

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